The Ted Spread

Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.

Corn Use for Ethanol

Jan 31, 2013

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.

Greetings from the Top Producer Seminar!

Another low volume trade day in the grains while we wait to see how much rain falls on South America and their prospects for the next two weeks. While we wait I figured I might touch on a subject that I personally have heard little about - Corn Usage for Ethanol. In recent years ethanol production has become a bigger and bigger factor in the corn balance sheet. We have talked a lot the past few months about corn exports lagging behind at a time of year where we should be seeing big sales, but ethanol thus far has sort of been flying under the radar.

The USDA is currently projecting corn use for ethanol production at 4.5 billion bushels. This crop year's usage through the first 21 weeks has been just under 1.79 billion bushels. This works out to 85.13 million bushels a week on average compared to the 87.09 million bushels per week on average needed to hit the USDA estimate. So corn usage for ethanol is consistently falling 1-2 million acres below the USDA estimate. This could mean that if ethanol production does not ramp up there could be 50-100 million bushels going back into the balance sheet.

Profit margins for ethanol plants in Iowa are running at a loss of 30 cents a bushel. This is actually an improvement over the previous 5 weeks when profit margins were well over negative 50 cents a bushel. Yes, there is an ethanol mandate so we can not completely shut down all together, but with ethanol stocks still running 2% over last year there is little to no incentive to increase production at the moment. This climate could easily change buy a rally in crude oil driving ethanol prices higher or a drop in corn prices lowering input costs, or both. However, for now it looks like the USDA could be over estimating corn demand for ethanol.

All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have corn near $7.00 and soybeans near $14.00. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!

Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.

FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION

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Anonymous1/31/2013 04:01 PM

Hi Ted, I look forward to your analysis every Tues. and Thurs.! On the ethanol demand: Is it possible that high crude prices contribute to suppressed demand? If the plants operate at a loss because of the indispensable oxygenate role, perhaps the volume of ethanol produces tracks gasoline demand. That would mean perhaps positive gas-ethanol spreads might not be so good for ethanol demand....